New Oil Suit Adds Bank, Fund, Traders to Mix In Benchmark Schemes

A lawsuit in New York federal court adds some new names and details to allegations of price manipulation that have been coursing through the global oil market for months.

The suit, filed by four floor traders on the New York Mercantile Exchange, is one of several filed in the wake of disclosures by international and U.S. regulators beginning in May that they were investigating claims that big oil traders are bending pricing benchmarks to their will.

Among the newly accused: Morgan Stanley, one of the biggest banks in the oil market, along with two of the biggest trading houses and one of the energy market’s top hedge funds. Unlike the other lawsuits, which mainly back up their charges with media reports and publicly available data, this suit is a dense slogthrough the arcane world of price-setting for Brent and its related benchmarks. It claims to detail precisely how the alleged manipulators executed complex trades to move prices in a favorable direction.

The plaintiffs, one of them a former Nymex director and executive committee member, assert oil majors Royal Dutch Shell, BP and Statoil, investment bank Morgan Stanley, trading houses Trafigura Beheer and Vitol and hedge fund Phibro Trading conspired to fix and manipulate Brent prices by submitting false data about trades to price reporting agency Platts, which publishes physical benchmarks for the market.

It alleges Shell and Morgan Stanley executed a February 2011 trade for delivered Brent at a discount to the going rate at a time when prices were rocketing higher and volatility was spiking amid fears of Libyan supply disruption during the Arab Spring revolutions in the Middle East. The complaint asserts Morgan Stanley helped Shell push down prices for Brent and a related contract to benefit Shell’s pre-existing trading position. The trade, at a 25-cent discount to the benchmark, was reported during Platts’ narrow price-reporting window that is used to calculate the daily benchmark, even though trades just outside the window were as much as $1 higher than the benchmark. (These numbers might seem like small potatoes, but for a typical 600,000-barrel cargo that would create a $750,000 difference, not to mention the impact to any derivative position in the market).

The suit also claims Shell, BP, Vitol, Phibro and Trafigura manipulated the market up and down during September 2012 through a variety of means including fake bids and offers (“spoofing”), wash trades and contracting huge amounts of freight capacity to create the false impression of removing oil from the market.

Platts, a unit of McGraw Hill Financial, comes in for stiff criticism, with the case asserting it was so dependent on the oil companies for revenue that it turned a blind eye to the behavior. Platts is not named as a defendant in the case. A spokeswoman did not reply to an e-mail seeking comment.

Trafigura and Vitol declined comment, as did oil companies Shell and BP. A spokesman for Norweigian oil producer Statoil said: “It’s not unusual that these kinds of lawsuits are filed.” A Morgan Stanley spokesman said: “We believe it to be wholly without merit or any evidence.” A spokesman for Phibro said any claims the fund was involved in activities under investigation by multiple U.S. and international regulatory entities are “totally without merit and Phibro will vigorously defend itself.”

The plaintiffs are no strangers to oil market investigations themselves. A check of broker records on the National Futures Association website shows the first named plaintiff, ex-Nymex executive Kevin McDonnell (trading badge: “KMAC”), has a record of 34 citations, mostly for garden-variety record keeping but also for conduct, financial issues and trade practices. He was fined $35,000 in 2011, banned from trading and suspended as a member for two weeks for failure to supervise subordinates and says he “discussed and advocated conduct by his employees that was in violation of accepted trading principles.”

David Kovel, the lawyer for the plaintiffs, said Mr. McDonnell’s violations were “relatively minor” given his long history as a heavy trader on the floor and that the accusation stemmed from an employee stealing from his account.

So: long-standing allegations and investigations of oil benchmark manipulation remain alive and well, alongside like probes into forex pricing and interest-rate setting. Is anything in this world nailed down?